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Alpha Partners’ Michela Bracich 

O. Henry: SVB Seeking Alpha [1]

Arriving at Denver International Airport on my birthday, March 8, 2023, I waited for my brother, Laurie, to arrive from BWI Airport. We were going skiing in Winter Park and our brother Ned would meet us outside, when Laurie arrived. As I sat in the DEN arrivals waiting area, a group of men assembled in the airport and were met by a young woman with a clipboard. She was greeting them with warm smiles, handshakes and hugs as they walked from the train transport to the baggage claim area. Checking off the names of the attendees, the woman, whose name tag read, Michela Bracich, seemed busy checking inbound flights, and chatting with talkative male clusters. The young woman’s polo shirt sported the logo for Alpha Partners. When the crowd of men dispersed to capture bags and hop on an awaiting bus, I asked Michela if she were herding cats. She laughed and said, “Not exactly, this is a group of venture capitalists and fund managers from around the country, who gather annually to attend a weekend retreat at a ranch in Wyoming. They are all members and affiliates of Alpha Partners, based in New York. They will spend time brainstorming with us, playing golf, enjoying great food and relaxing.” 

Little did anyone know that hours later these entrepreneurs would wish they had better cell phone coverage over the coming days. The venture capital world was slammed that day by some dramatic news: after the market closed that day (2pm Mountain Time), SVB revealed that it had absorbed a $1.8 Billion loss on the sale of its long-term bond portfolio. The acquirer of the entire portfolio was alleged to be Goldman Sachs; however, the company press release failed to name Goldman as the potential buyer, saying only that it would be selling additional shares to raise capital.

Goldman Sachs later reported that it intended to purchase the securities portfolio of SVB at a discount to market. Silicon Valley Bank, the most revered mid-tier bank that funds start-ups and venture capital companies, was inextricably linked to the existing and potential future start-ups in the US. Their clients, Alpha Partners seed capital companies, among others needed both capital infusions and market credibility from their financial institutions. Goldman had made separate arrangements for General Atlantic to pony up $500 MM in the stock sale that was supposed to be imminent.

Over the next 48 hours, at an extraordinarily fast pace, the banking world would be shaken from top to bottom by fear of a market contagion equal to 2008.

WHAT HAPPENED?

On Wednesday after the market closed, SVB stock price per share dropped 8%, which was less than Goldman feared the stock would fall. Less than one hour later, news came from left field: Silvergate Capital Corp, the crypto lender of choice, reported that it was shutting down after a run drained its deposits. Although seemingly unrelated to SVB, the Silvergate news injected the fear of contagion, as it seemed melting crypto funders were sliced up and poured into the market hot sauce. Shortly after that Silvergate announcement, at 8pm EST, the bond rating firm Moody’s downgraded SVB debt by one notch, which was milder than SVB bank management had feared and anticipated.

When the market opened at 9:00am on Thursday, March 9, the SVB shares quickly tanked, which prompted many of the business clients and retail customers of SVB to pull their deposits. That morning trading in SVB proved to be a continuation of Wednesday’s aftermarket drop of the stock. As news of the deposit run spread, the shares fell further, as if off a cliff, prompting more customers to yank their money from SVB. At the closing bell the stock price closed down 60%. As the post-market day dragged on, Goldman lined up some potential investors for SVB at $95/share, which was an $11 haircut below the closing price.

By 5pm EST, Goldman banker’s received word on SVB’s $42 Billion in deposit outflows. With that bad news, the lawyers with Sullivan & Cromwell, LLP declared that without disclosures of the billions in deposit losses the deal was dead. Shortly after the lawyers’ pronouncement, Goldman executives decided to abandon the portfolio purchase deal. Immediately the Federal Deposit Insurance Corporation (FDIC) stepped in and seized SVB. There was no trading of the bank’s stock on Friday, March 10, while the FED and FDIC sorted matters out.

WHAT “USUALLY” HAPPENS?

Back in the dark days of 2008, there were many bank closings. The FDIC timed their bank takeovers to occur at regular intervals. There were over 450 of such closures, so they got good at it. The FDIC knew ahead of time who was in trouble and they did the majority of the work starting on Fridays and ending on Sundays. On a usual Friday, after the close of the market, the FDIC would name the banks that it intended to take over. Over the weekend, they would appoint a conservator for each bank, who would oversee the procedures of the bank for the immediate future. They would line up a likely buyer for the remaining assets, debts, and owner’s capital of the bank, if there were any, and would arrange for a Bridge bank to be established for the smooth transition to the new owners. Come Monday, the Bridge bank would be open for business under new ownership. The press releases were written, sent to the wires, read by the interested parties and the accounts were straightened out the next week.

WHY WAS 2023 SO UNUSUAL?

First, it had been 15 years since those dark days of bank closures, so perhaps some amnesia gummed up the works. And there seemed to be no one watching for such a fall from grace. Second, the speed from potential danger to collapse was a matter of days, due to the conflagration of social media, Slack, and IM and the market created a loud echo chamber. Fanny the flames were a few cross-currents: an inverted yield curve, the imminent raising of the overnight rates by the FED, the banks finding it tougher to make profitable loans due to market dynamics, and the ungluing of the “carry trade” with positive results. Third, the rapid funnel to failure will take more time to sort out what happened, how it happened, what mistakes were made, and what regulators must do to rectify the landscape. Willing buyers of SVB’s tarnished assets and liabilities may take awhile to assemble.

Clearly showing are the rocks from the receding tide and open loopholes from the easing of the Dodd-Frank Act for non “too big to fail” banks, that allowed this catastrophe to occur in the first place. After all, Dodd-Frank is formally known as the Wall Street Reform and Consumer Protection Act. It’s time for Wall Street to clean up its act again. Lastly, almost as a footnote was the news of another bank, Signature Bank, had also failed. At $110 Billion, Signature marks the 3rd largest bank failure in history. Who once sat on Signature Bank’s Board? Ironically it was former Massachusetts Congressman, Barney Frank, collecting $500,000 a year to serve on the board.

IS THERE A PATTERN HERE?

Over the weekend of March 11 – 12, 2023, there were further aftershocks in the US banking sector. SVB’s failure was the second largest bank collapse in US history. The largest bank failure was Washington Mutual Bank, [Links to an external site.] back in 2008, which was worth $307 Billion, before it failed due to a diseased dose of mortgaged-backed securities in its vast portfolio. 

Silicon Valley Bank [Links to an external site.] (SVB) had a stellar reputation in the venture capital world as the “go-to bank” for start-ups. Things fell apart rapidly in what can be characterized as a classic “run on the bank,” when depositors requested $ Billions in withdrawals, and the bank did not have the cash available to backstop those requests for withdrawal. Management had to sell their entire portfolio of long-term, low interest Federal Bonds, at a $1.8 Billion dollar loss to come close to satisfying its depositors. This action spooked everyone in the banking world and as indicated in the paragraphs above, the story ran rampant on communication channels.

The depositors all rushed for the doors at once. One substantial problem was that 80% of the depositors who had investments held at SVB had deposits at substantially higher dollar levels than the $250,000 limit that FDIC protection would cover. Depositors who had accounts worth $1 Million, would immediately withdraw $250,000 and lose the difference ($750,000). That’s when the elbow swinging became ferocious as Wall Street heavyweights (Mark Cuban [Links to an external site.] and Kevin O’Leary [Links to an external site.] and Bill Ackman [Links to an external site.]) started to throw their personal might around trying to bully the banking system to allow them to withdraw ALL of their money, not just up to the FDIC limit. The heavyweights used their clout to forecast further bank meltdowns, as the infectious news spread around among other banks in the country.

WHO WILL PAY FOR THIS MESS?

There are several answers to this one. The first to pay will be the executives of the bank, during the perp walks, who will be stripped of much of their wealth and then publicly humiliated and sanctioned by Congress. The next to pay will be the stockholders, who will likely be wiped out by these Federal actions. The bank stock has ceased trading, while the FED and FDIC, attempt to find a buyer for the remainder of SVB. According to President Biden, common citizens will not pay this penalty through some sort of hidden tax. Instead, the other registered banks in this country will pay dearly through special charges to make the depositing clients of SVB whole. The large and small banks collectively, like a special HOA fee (e.g. for shoring up a jointly used facility at a condominium), will have to pay to bail out those claiming harm in the default.

Will the FDIC raise the limits above $250,000 for all FED oversight banks? We will have to see what Congress and Janet Yellen at Treasury have to say about that matter.

WHY IS THIS IMPORTANT?

In the chapter on FEDERALLY INSURED BONDS [Links to an external site.] comes into intense focus, as we try to figure out what was going on. What is the difference between pricing-to-maturity and mark-to-market in the pricing of a long-term bond?

Other Questions: What is the real story about SVB’s long-term bonds? What other attempts did the C suite executives [Links to an external site.] make to save SVB? Why was the Goldman advice so misguided? What customer companies are most at risk [Links to an external site.] if the bank bailout is not successful? Note: If you add the deposits of Roku ($487 MM) Bill Holdings ($300 MM), Roblox ($150 MM) and Ginkgo Bioworks ($74 MM) that quartet represents over $1 Billion in deposits at risk due to under-insurance.

It’s hard to know how many of the attendees of the Alpha Partners retreat lost clients due to the collapse of SVB, but I am imagining that more than one attendee threw up their lunch during the news feeds last weekend. The bank community will recover, but not until the dust settles from these latest market and FED gyrations. 

WHAT HAPPENS NOW?

Since SVB is technically defunct, there will be a line for those who will be filing lawsuits against management and any oversight infractions that lawyers wish to litigate. The various stakeholders will have to find their way to justice, including management, stockholders, bondholders, employees, and community members. The stockholders will likely be wiped out in favor of the bond holders. The employees will lose out for the most part and the customers will have to move their financial relations to another institution. The bank has been renamed the Silicon Valley Bridge Bank, a subsidiary that will work to create a smooth transition of SVB to another owner, probably located in someplace other than Santa Clara, California.

This is not time to relax. Keep all eyes on Credit Suisse, PAC West Bank, Deutsche Bank, and First Republic Bank as the problems become global in the banking world. Who will we discover next to have breached the common sense safeguards of the regulators?

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References:

[1] While the term “Seeking Alpha” is alive and well in the investment lexicon, the play on words for this O. Henry Post is purely circumstantial and coincidental. I have no relationship or prior knowledge of Alpha Partners AND was struck by the situation at the Denver Airport and the Alpha Partners’ trip to southern Wyoming. For those who may not know of the term Seeking Alpha, it has often been both a private company with paid followers and a concept. More specifically, “Seeking alpha” is a mantra of some investment firms and hedge fund managers. Alpha strategies, in general, are active investment strategies that focus on choosing investments that have the potential to “beat the market,” which is how many firms keep score.